Big improvement in wool price competitiveness is a bonus, according to brokers' body

Showing strength in value-for-money

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Low wool prices in recent months have had one positive outcome, in terms of improving competitiveness with other natural and synthetic fibres.

Low wool prices in recent months have had one positive outcome, in terms of improving competitiveness with other natural and synthetic fibres.

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After continuing to fall at the start of September, Australian wool prices rebounded sharply for the remainder of the month as processors started to worry abo...

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After continuing to fall at the start of September, Australian wool prices rebounded sharply for the remainder of the month as processors started to worry about restricted auction supplies in coming months.

While raw wool demand and global economic growth have been very poor, the price competitiveness of wool against other fibres has improved substantially.

This could help kick-start a sustained, if only moderate, improvement in raw wool demand.

Wool prices reached a low point at the start of September, with the Australian Wool Exchange Eastern Market Indicator (EMI) dropping to 858 cents a kilogram. This was its lowest level since November 2009.

Then, to the surprise of many participants in the market, prices rebounded by 178c/kg in the following three weeks to reach more than 1000c/kg.

This lift included a one-week jump of just under 100c/kg in the week ending September 25.

Interestingly, this pattern echoes what happened with wool prices 12 months ago - during August and September 2019.

A year ago, wool prices fell sharply throughout August to reach a low point in the first week of September - before a sharp recovery by the end of that month.

The EMI did not revisit the early September 2019 low until April this year, when the impact of the COVID-19 pandemic hit home.

Recent improvements in wool prices came as the damaging economic impact of COVID-19 and associated restrictions in the first half of 2020 was revealed.

Gross domestic product (GDP) fell sharply in many of the major wool consuming countries during the April-June quarter 2020.

The biggest decline in GDP was in the United Kingdom, with a fall of 22 per cent compared with the same three months in 2019.

GDP contracted 19 per cent in France, 18 per cent in Italy and there were big falls in Germany, Japan and the USA. The contraction in South Korea was smaller than in these countries.

In contrast, China's GDP grew by 3 per cent in the April-June quarter. But this modest growth came after China's economy contracted 6.8 per cent in the March quarter.

The good news is that the Organisation for Economic Cooperation Development (OECD) - in its revised (and more encouraging) forecasts for economic growth around the world - reported that the June quarter will be the low point.

The OECD expects the global economy will rebound in 2021, with growth of 5 per cent to recover part of the losses seen in 2020.

Even so, it predicts the world economy will be smaller at the end of 2021 than it was at the start of 2020.

The collapse in economic growth around the world due to the COVID-19 pandemic has had huge impacts on raw wool demand, as is evident from data on wool exports by the five major wool producing and exporting countries.

Data about Australian wool exports in July show that the volume of exports to all destinations were down 8 per cent. This came despite an 8 per cent increase in exports to China.

The trend was replicated in wool exports from New Zealand, Uruguay and Argentina - three of the other five major wool producing and exporting countries.

For these three countries, the monthly declines in July were bigger than those for Australia.

In July, the volume of exports from New Zealand, Argentina and Uruguay fell by 11 per cent, 39 per cent and 73 per cent respectively.

The exception among the five major wool exporters was South Africa, which has had more exports compared with this time in 2019 because of last year's ban by China on imports from South Africa due to an outbreak of Foot and Mouth Disease.

In terms of the major destinations for the raw wool from these five countries, exports to Italy were down 14 per cent, exports to the Czech Republic were down 38 per cent and exports to 'other' European countries (including Bulgaria and the UK) were down 32 per cent.

Exports to India fell 12 per cent and exports to 'other' countries (including Egypt, Malaysia, Japan, Korea, Taiwan and Thailand) fell 39 per cent.

There are some tentative signs of improvement in raw wool demand from China, the biggest wool importing and processing country.

Exports to China from the five major wool exporting countries had only a small drop in July, down by 1.9 per cent. This follows an increase in June.

These two monthly figures are encouraging for signs of improved demand for raw wool by mills in China.

This improved demand seems to have continued in September, given the wool price rise this month.

As reported previously, wool prices have fallen proportionately more than prices for competing fibres, such as cotton, acrylic and polyester.

One positive result of the bigger decline in wool prices compared to that of competing fibres is that the wool price ratio against cotton and synthetics has fallen back sharply since March. This means that wool's price competitiveness has improved substantially.

The fall in the ratio of wool prices has been stunning, particularly against cotton which is currently at 5.88:1 for 18-micron wool; 4.46:1 for 21-micron wool; and 2.09:1 for 28-micron wool. A year ago, the ratios were 8.08, 7.28 and 4.04 respectively.

The current price ratios for 21-micron and 28-micron wool against cotton are the lowest since May 2011.

The price ratio for 18-micron wool is the lowest since March 2014.

The decline in wool's price ratios compared with the major synthetic fibres used in apparel has not been as marked, but is still significant.

The current price ratios for 18-micron and 21-micron wool, at 5.81:1 and 4.41:1 respectively, are down from 6.82 and 6.14 in September 2019.

For the 28-micron wool price ratio, which is a ratio against the price for acrylic fibre only, the current level of 1.7:1 is the lowest point since May 2011.

These low-price ratios are a positive, as it may encourage garment makers, knitters and weavers to use more wool and less competing fibre - particularly when clothing retail sales recover.

This should help provide a sustainable, if moderate, improvement in demand for wool and in wool prices.

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